Know more about credit rating

A lot has been said about credit ratings that influence the financial strength of companies and their ability to meet debt repayment obligations. The credit rating is determined after weighing the liabilities and assets of the firm. The ratings are assigned by a Credit Rating Agency (CRA) and it takes into accounts factors like firm’s financial statements, type of debts, previous credit repayment history and future capability, etc. Each of these factors contributes to computing the company’s rating.

The process of credit rating starts after a rating request from the issuer, signing of a rating agreement and paying a requisite fee. The process, by all accounts, is extremely intensive. Both negative and positive factors affect your firm’s ratings. The CRAs assign the rating to debt instruments like non-convertible/partially convertible debentures, short-term debt, bonds, fixed deposits, etc., and not to equity instruments. These agencies owe a huge responsibility to the lenders/investors; and irrespective of any issues, they are liable to ensure transparency in the rating exercise.

Before we move on, it is important to realise that credit rating is not a guarantee, but merely an opinion of a rating agency.

Just check out on points on which ratings can be delivered.

• Credit ratings are provided on 
• Bond/debenture - issued by corporate, government etc.
• Equity shares -  issued by companies, but is not mandatory in India
• Medium-term loans (Public deposits, CDs etc.) – rated on fixed deposits taken by companies 
• Short-term instruments – the rating of commercial papers is mandatory
• Real estate, builders and developers – 
• Chit funds - rated on their ability to make timely payment of prize money to subscribers
• Collective investment schemes – rating depends whether the scheme will be successful or not 
• Insurance companies - rated based on their claim paying ability
• Borrowers 
• Banks – ensures their credibility and the capacity of repaying customer’s deposits
• States – helps attract investors from within the country and abroad
• Countries – aids interested foreign investors and lenders to know the repaying capacity and willingness of the country to repay loans.

  Keep a track of your ratings

Keeping a track of your company’s rating ensures there are no errors on your file.  Once the rating is assigned and accepted, the CRAs are liable to perform periodic surveillance of the credit quality of the rated instrument/ company. The ratings keep changing depending on the company’s financial performance and the CRA may notify it from time-to-time.

So, check your credit rating regularly and get in touch with the credit reporting body if you need your company’s report needs to be corrected.

To find out more about matters that could affect your firm’s ratings stay around and log on to https://civilscores.com/credit-rating.